Monday, January 11, 2010
8:16:49 PM EDT

Monday Delivers A Mixed Bag

by
Todd Shriber

Two of the three major U.S. indexes moved higher on Monday as the S&P 500 gained a mere two points to extend its streak of higher closes to six consecutive days. Helped by expectations of a bullish earnings report from aluminum giant Alcoa (AA), the Dow Jones Industrial Average added almost 46 points to finish the day at 10,663.99. The Nasdaq was the laggard of the group, shedding almost five points to close at 2312.41.

Stats Table

Stocks got a boost from news that China increased exports in December and imports in the world's largest country by population surged to a record, fueling speculation that a global economic recovery is underway. China's customs bureau reported that exports rose nearly 18% in December 2009 compared to the year earlier period, the first increase in 14 months. Imports soared nearly 56%. There is no denying that China's economy is still heavily dependent on exports given that there are only faint signs of a middle class emerging there to turn consumption inward, but the import number may be more significant.

After all, China, perhaps even more so than its emerging market brethren, is also heavily dependent on commodities and raw materials to make keep its burgeoning economy chugging along. Coal, oil, copper and related fare are the types of goods China needs and the equity market seems quite willing to acknowledge that fact.

China Exports

Speaking of stocks acknowledging China's voracious materials demand, check out Caterpillar (CAT), the world's largest maker of construction and mining equipment. The Dow component is a name I mention somewhat regularly in this space, though it has been awhile between appearances. Caterpillar turned in its best day since July on Monday, soaring 6.3% to close at $64.13, just below the new 52-week high of $64.52 that was touched earlier in today's trading session.

Caterpillar helped industrials gain 1.2% as a group, good for the best run among the 10 industry groups tracked by the S&P 500. The move is not all that surprising on a day when positive China news buoys positive investor sentiment because Caterpillar derives a fair chunk of its revenue from international markets and when China needs more goods that are found beneath the earth's surface, the companies that extract those materials are probably going to need more Caterpillar products. That is good news for Caterpillar, whose products do not come cheap. I looked at a Caterpillar dealer Web site and this particular dealer was selling USED track excavators for as much as $60,000, so I assume a new track excavator costs much more.

Caterpillar Chart

Alcoa was another industrial name and Dow member in the news today as the largest U.S. aluminum producer once again kicked off another earnings season by delivering its fourth-quarter results after the market's close. Pennsylvania-based Alcoa reported a smaller fourth-quarter loss of $277 million, or 28 cents a share, compared with $1.19 billion, or $1.49 a share, a year earlier, but sales slumped to $5.43 billion from $5.68 billion. Stripping out a 28-cent per share charge, the company broke-even, but still missed analyst estimates that called for a profit of six cents a share. Alcoa did beat on the top-line as analysts were expecting sales of $4.86 billion.

Alcoa said it sold most of its aluminum for 97.8 cents per pound in the fourth quarter, up eight cents from the third quarter, but a weak dollar hurt results in some of its business units. The stock was up 2.5% on Monday, but all of that gain and more was given back in the after-hours session with Alcoa shares down more than 5% as of this writing.

The decline in after-hours trading could be short-lived because Alcoa Chief Executive Officer Klaus Kleinfeld said on the company's conference call that Alcoa is expecting aluminum demand to rise by 10% in 2010. That number includes expected demand from China, but taking China out of the equation, Alcoa still expects a 5% uptick in demand fueled by orders from other BRIC constituents like Brazil and India.

Alcoa Chart

Another Dow constituent that was active after the market closed was Chevron (CVX), the second-largest U.S. oil company. Chevron said it expects fourth-quarter profits will be lower than those posted in the third quarter when the company earned $1.92 a share. The company cited ''significantly weaker'' refining margins and did not elaborate much beyond that statement. Analysts expect Chevron to earn $1.75 a share for the fourth quarter on revenue of $43.8 billion. The stock touched a new 52-week high of $81.09 before closing at $80.88 in regular trading, but the shares traded as low as $80.15 in after-hours trade. Chevron is scheduled to deliver results on January 29.

On a day that featured plenty of analyst chatter on an array of stocks and sectors some of the more curious commentary did not come from an analyst at all, but from Saudi Prince Alwaleed bin Talal regarding Citigroup, of which Alwaleed is the largest individual shareholder. The king of the writedown, I mean Citi, was up 1.1% after Alwaleed said the worst is behind the third-largest U.S. bank.

Alwaleed has been nothing if not a faithful and long-suffering shareholder of Citi, but there are a couple of things that point to taking his commentary with a grain of salt might be the best course of action. Citi is still a troubled company that trades for less than $5, meaning most institutional investors have to shy away from the shares. Next, the prince recently shifted his $4.3 billion Citi stake from his personal account to his Kingdom Holdings investment account, perhaps indicating he is not as bullish on the shares as his Monday comments indicate. Either way, the prince thinks Citigroup will be profitable in 2010, though he did not say exactly when.

Citi Capital Raises

As I mentioned earlier, the Nasdaq was the lone decliner of the three major U.S. indexes on Monday and the tech-heavy index may get off to a glum start on Tuesday after video game maker Electronic Arts (ERTS) cut its 2010 forecast. The stock was trading down $1.44, or 7.9%, to $16.83 in after-hours trading after closing at $18.27.

For the fiscal year ending in March, Electronic Arts said it expects to earn 40 cents to 55 cents a share, well below previous guidance of 70 cents to $1 a share. Analysts are currently forecasting a profit of 79 cents a share, though that is bound to come down after downgrades are issued in the coming days. Even worse than that dour outlook is the fact that Electronic Arts, maker of the ''Madden'' football franchise among other popular video game franchises, apparently did not perform well during the October-December quarter, which is obviously a critical time of year for video game makers.

For that quarter, the company expects to miss profit and revenue estimates and will repeat that dubious trick for the full fiscal year. This is the same company that lowered its headcount by 17% in November to pare costs, so today's news is probably even more disappointing to investors. One analyst said the company is not performing well and management cannot seem to explain why. That is not an encouraging assessment to say the least.

Electronic Arts Chart

Fortunately, Monday is just one day, and Alcoa's outlook is what may perk investor interest in that stock, but the Nasdaq may be off to an ominous start to earnings season. Then again, one of the index's most important constituents, Intel (INTC), reports results on Thursday after the close. To say that Intel's earnings announcement is the marquee market event this week may be somewhat of an understatement when considering that the Nasdaq was easily the best performing of the three major indexes in 2009.

Many investors may be speculating that the fate of the tech sector for this earnings season hinges on Intel's results and outlook. Intel unveiled some new processors at the the Consumer Electronics Show in Las Vegas last week, but the real story here is going to be the ability of the world's largest chipmaker to do what it has done the previous two quarters and that is blow away Street estimates and help stoke the flames of another tech rally.

Analysts are forecasting a profit of 30 cents a share on revenue of $10.16 billion. If those numbers are soundly beaten and Intel offers a rosy outlook for 2010, the stock will likely pop on Friday.

Intel Chart

Looking at the charts, the Dow is inching closer to resistance at 10,700. Noteworthy is the fact that this is resistance from 2006 and the catalysts are there for the Dow to make some headway. That also means there might be some ammunition for the bears as well. Tuesday's trade could be telling as traders and investors absorb the Alcoa and Chevron news. Remember that the Dow is a price-weighted index, meaning the higher a stock's price, the bigger its weight in the index. That is a long way of saying Chevron matters more than Alcoa.

Regardless of what happens tomorrow, 10,500 still looks like the first support area. Friday should be another important day for the Dow with Intel's results coming after the bell on Thursday and JPMorgan Chase (JPM) updating investors on Friday morning. JPMorgan could be a tone-setter for the banking sector and if the second-largest U.S. bank disappoints, the end result is not going to be pretty for the banking group. A reasonably positive outlook for 2010 and an update regarding a higher dividend would be positive catalysts for JPM.

Dow Chart

The S&P 500 has a lot of real estate in front of it before it bumps into its next resistance area at 1200 and support seems firm at 1115, but are there cracks in the bullish armor? I read a few anecdotes this weekend that I thought were interesting. One said that 85% of the S&P 500 is trading above their 50-day moving averages. Take a look at the recent Investors Intelligence surveys and you will find that bulls out number bears by nearly three to one and the average investor has increased his/her stock market exposure to 64%, the highest level since October 2007.

S&P 500 Chart

The worst day the Nasdaq sees this week may be Tuesday as investors react to the Electronic Arts news, but we are not talking about Amazon (AMZN) or Apple (AAPL) here, and with expectations high for Intel's report later this week, the damage done by EA is likely to be well-contained and not enough to drag the Nasdaq to support at 2250. The focus is on Intel and if the report is good, the index could make up some of the ground between today's close and the important 2350 level.

Nasdaq Chart

With another earnings season about to begin in earnest, reports from Intel and JPMorgan will probably be the determining factors in how stocks finish the week. Beyond that, earnings quality and 2010 guidance should be what investors are looking at in the coming weeks. The second quarter saw plenty of companies beating profit estimates due to lower costs. A few of them went back to that well in the third quarter, but that trick's expiration date has passed. Now, it is all about the 2010 outlook and higher top-line guidance.